Integration in European Retail Banking : Evidence from savings and lending rates to non-financial corporations

The aim of this paper is to investigate the integration process in the European Union retail banking sector during the period 1995-2008, by analysing deposit and lending rates to nonfinancial corporations which represent one of the main constituents of retail banking. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. The results obtained point to the presence of close convergence in all deposit rates and in the short-term lending rates to non-financial corporations. However, we also detect the presence of heterogeneity in the European retail banking sector with notably some diverse convergence patterns observed for the transition paths for the deposit and lending rates with longer maturities.